Market Briefing: FX hibernation

CalendarMarch 28, 2024
  • Quiet markets. US equities rose, while bond yields slipped back. Limited moves across the major currencies. AUD treading water.

  • Japan FX. Rhetoric from Japanese officials about the weak JPY continues to ramp up. Risks of intervention to boost the JPY are on the rise.

  • AU data. Retail sales due today. Will spending on merchandise/hospitality during recent concert tours & the extra leap year trading day boost turnover?

On balance it has been another fairly quiet night for markets. US equities rose with a lift late in the day on the back of month/quarter end portfolio rebalancing helping the S&P500 (+0.9%) post its first gain in four sessions. US bond yields slipped with the benchmark 10yr rate shedding ~5bps to be at 4.19%, slightly above its ~1-month average. There were similar moves in UK and Germany long end bonds. In FX, the net changes over the past 24hrs have been minimal with the major currencies generally within 0.1% of where they were this time yesterday. EUR is hovering near ~$1.0830, GBP is around ~$1.2640, USD/JPY is at ~151.30, while the NZD (now ~$0.60) and AUD (now ~$0.6535) are virtually unchanged.

USD/JPY exhibited the most intra-day volatility of the bunch having traded in a ~0.6% range yesterday. JPY weakness isn’t going unnoticed in Japan. After USD/JPY hit its highest level since 1990 the verbal rhetoric from Japanese officials ramped up further. Finance Minister Suzuki flagged that they “will take bold action against excessive moves”, though it was news the Bank of Japan, finance ministry, and Financial Services Agency was holding an emergency meeting about developments that got the markets attention. The heightened risk of Japanese FX intervention helped the currency claw back a little ground. As our chart shows, outside of the late-80’s, the JPY is now in very rarefied air. Since 1989 USD/JPY has traded above where it is less than 1% of the time. Japan's trade weighted index is also lower compared to when they last intervened to prop up the currency in 2022. We believe there are asymmetric risks around USD/JPY (and the JPY in general) near current levels. In our view the odds the Japanese wade into markets to boost the JPY are elevated, especially as the negative economic/inflation impacts stemming from a weaker currency and the ‘speculative’ nature of the moves are being pointed to. If it occurs, Japanese intervention could have a knee-jerk impact across FX markets given USD/JPY is the second most currency pair, with a drop in USD/JPY set to drag on the USD.

In addition to keeping an eye on developments in Japan markets will also be focused on a speech by US Fed Governor Waller on the outlook (9am AEDT). Governor Waller is a leading voice on the FOMC. With markets discounting a more ‘patient’ approach we think comments that he hasn’t been swayed by the recent uptick in inflation and still foresees steady 'policy recalibration' later this year might take some of the heat out of the USD. Due to the Easter holidays reaction to the US PCE deflator (the Fed’s preferred inflation gauge) and Chair Powell’s upcoming appearance (both Friday night AEDT) won’t fully occur until next week.

Global event radar: US PCE Deflator (Fri), US Fed Chair Powell Speaks (Sat), China PMIs (31st Mar), Japan Tankan (1st Apr), US ISM (2nd Apr), Eurozone CPI (3rd Apr), US Jobs Report (5th Apr), US CPI (10th Apr), Bank of Canada Meeting (10th Apr), ECB Meeting (11th Apr).

AUD corner

The AUD has had another range-bound 24hrs. At ~$0.6535 the AUD is broadly inline with where it was this time yesterday with limited new information coming through to move the dial. There have also been minimal net moves on the major AUD crosses. Outside of AUD/JPY (-0.2%), which has dipped back under ~99, other crosses like AUD/EUR, AUD/GBP, AUD/NZD, and AUD/CNH have tread water.

Locally, the February reading of the monthly CPI indicator was released yesterday. And while the annual headline run-rate held steady at 3.4%pa, in contrast to predictions looking for a slight lift, due to things like lower gas prices, some falls across volatile food items, and further disinflation in 'goods', the stickiness in ‘services’ prices remains. Indeed, services inflation quickened (from 3.7%pa to 4.2%pa), as did core inflation (the trimmed mean nudged up to 3.9%pa). As our chart shows, while Australia’s inflation pulse is evolving as per the RBA’s latest thinking, the lingering pressures on services prices due to the tightness in the labour market/rising wages, and other things like rents suggests the ‘last leg’ of the return to target could be slow going.

In our opinion, the detail below the surface in the monthly CPI report suggests the RBA may hold interest rates at current levels for a while, and further out it might lag other central banks when it comes to the global rate cutting cycle. The diverging policy outlooks between the RBA and others, and adjustment in short-dated yield differentials, should be AUD supportive over time in our view, especially on crosses like AUD/EUR, AUD/GBP, and AUD/NZD. Signs China’s economy is improving, and a strengthening in the JPY (given the broader USD impacts) would also be AUD positives.

Today, as mentioned, in addition to being on Japan FX intervention watch, markets will also be fixated on a speech by US Fed Governor Waller (9am AEDT). Indications that this influential policymaker remains of the view that the Fed will have scope to recalibrate settings and gradually lower interest rates later this year might exert a little downward pressure on the USD. This in turn may give the AUD a bit of a boost. As could a better than anticipated Australian retail sales report (11:30am AEDT). We think spending on merchandise and hospitality during the recent Taylor Swift and Pink concert tours, and the extra trading day due to the leap year, could see retail sales exceed consensus estimates (mkt +0.4%).

AUD event radar: AU Retail Sales (Today), US PCE Deflator (Fri), US Fed Chair Powell Speaks (Sat), China PMIs (31st Mar), Japan Tankan (1st Apr), US ISM (2nd Apr), Eurozone CPI (3rd Apr), US Jobs Report (5th Apr), US CPI (10th Apr), Bank of Canada Meeting (10th Apr), ECB Meeting (11th Apr).

AUD levels to watch (support / resistance): 0.6480, 0.6500 / 0.6560, 0.6590

FX Moves

Peter Dragicevich

Currency Strategist - APAC

Upcoming Events

THURSDAY (28th March)

USD Fed’s Waller Speaks (9am)

JPY BoJ Summary (March Meeting) (10:50am)

NZD ANZ Activity Outlook (Mar) (11am)

AUD Job Vacancies (Feb) (11:30am)

AUD Retail Sales (Feb) (11:30am)

CAD GDP – Monthly (Jan) (11:30pm)

USD Initial Jobless Claims (11:30pm)

FRIDAY (29th March)

USD Chicago PMI (Mar) (12:45am)

USD Pending Home Sales (Feb) (1am)

USD Kansas City Fed Index (Mar) (2am)

EUR ECB’s Villeroy Speaks (4:30am)

JPY Tokyo CPI Inflation (Mar) (10:30am)

JPY Industrial Production (Feb P) (10:50am)

USD PCE Deflator (Feb) (11:30pm)

SATURDAY (30th March)

USD Fed’s Daly Speaks (2:15am)

USD Fed Chair Powell Speaks (2:30am)

*Note, all times/dates provided are AEDT


Peter Dragicevich

Peter Dragicevich

Currency Strategist - APAC

Peter analyses and forecasts global macroeconomic trends to draw out possible implications for interest rates, commodity pricing, and the FX markets for Australia and across Asia.

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